In light of last Friday's discount rate cut made by the Federal Reserve to sooth the nerves of traders and mortgage brokers, a question returned to my mind. This question has puzzled me for quite some time, disturbing my slumber since I was old enough to grasp the seemingly subtle, yet ultimately obvious interaction between business, the government, and people:
Why has America developed an inverted social democracy: a democracy which values the welfare of corporations and other juristic persons1 far more than that of real persons?
Time and time again the majority of Americans have fought tooth and nail against the evils of socialism in any form. Nationalized health care? El Presidente Ronald Reagan produced a record for the American Medical Association in 1961 entitled "Ronald Reagan Speaks Out Against Socialized Medicine". The mere mention of socialized health care can create very passionate debate, rising to a level formerly reserved for Rove v Wade, the death penalty, and gay marriage, with each side becoming increasingly intolerable of the other. Raise the minimum wage? It took the Democrats retaking Congress to pass the Fair Minimum Wage Act and increase the minimum wage after 10 years of a stagnant minimum wage. And even after 10 years, 10 whole years of wage eroding inflation, 116 House Republicans (and no Democrats) voted against the measure. The $5.15 minimum wage enacted in 1997 can only purchase $4.14 today when adjusted for inflation, nearly 20% less. A 20% pay cut for the poorest workers, yet 116 people voted against raising the minimum wage back up to its 1997 purchasing power.
Yet, in matters that deal with market instability, the federal government has consistently acted immediately and swiftly to bail out corporations or cushion the pain felt by corporations and the market. At the mere possibility of financial instability in the markets due to the subprime credit woes, the Fed immediately and with no public debate cut the discount rate2 by a quarter point. On August 21, 2007, in the middle of market instability, the Chairman of the Senate Banking Committee, Sen. Chris Dodd, met with Federal Reserve Chairman Ben Bernanke. At this meeting Mr. Bernanke said he's "absolutely" prepared to use all the tools at his disposal to address the credit crisis in the U.S. financial system, a statement made in an attempt to reassure nervous investors and banks, the same banks who've dragged the financial markets in the developed world down into this subprime credit mess in the first place.
And what of the recipients of these loans, the customers who are having their homes foreclosed in record numbers as their adjustable rate mortgages (ARMs) jump 1-2% in interest, morphing formerly affordable mortgage payments into an unsurmountable mountain of debt? Certainly the Fed or Congress will act swiftly and decisively to ease their fears and nervousness, just as it has done with the markets. After all, these are real people, not just juristic persons like banks. Right? Right? The woes of warm blooded mammals most certainly come before that of an entity that exists as legalese inked on a 100% cotton bound heavyweight watermarked sheet of paper, right? What amount of help to extend, in what form, when, and if ever to help these individuals is all a matter of public opinion and Sunday talk show debate at the moment.
This makes sense, correct? These individuals got themselves into this situation. For the most part, the terms, risks, and stipulations of the loan were printed on the contract they acknowledged and signed in good faith. With the exception of the few truly deceptive lenders, all of these borrowers received full disclosure on their loans when they took them out. They were made aware that what is happening now was a real possibility.
Sure, this is true. But we've already demonstrated that the Fed acts swiftly and decisively to calm the slightest jitters in the markets, yet the government drags its feet, debates, contemplates, and ponders what to do for average citizens. These citizens are in desperate situations due entirely to the actions of the same institutions that the federal government is extending welfare to. These same institutions have made billions over the previous years, and now that the money has dried up and the consequences of risky lending have caught up with them, they're being rewarded by the Fed.
No matter what your views are politically, whether you're a fiscal liberal or conservative, this situation runs counter to your ideals. For liberals, the human victims should be extended welfare in the form of new, cheaper fixed interest loans, offered financial advising, or issued tax breaks. If you're a conservative, the institutions shouldn't be bailed out. The free market and Darwinism alone is enough to steady the economy. The strong will survive, the weak will perish, never to damage the markets again. Yet, our nightmare world ignores both sides, instead choosing the path of contradiction and irrationality.
But Dirac! If the banks fail, doesn't everyone lose? In the rare event that we have mass bank failings, yes, this is entirely possible. We are no where near that event, however. As I've pointed out in my previous articles, this threat to our economy has created a culture where banks know that at the slightest rumor of a single, isolated bank failing, the tiniest prickle of the hair on the back of the Federal Reserve Chairman's neck, the government will do everything in its power to offer them a generous bail out package, fully funded by our tax dollars, of course. It is obvious that this can, and has, created a culture of abuse, a culture that disregards the most basic rule in finance: the greater the reward, the greater the risk.
We must once more strive for the ideal, to return to the world where risk and reward go hand and hand, equally for everyone, citizens and big business alike. Businesses who've made billions and have the potential to weather most any financial storm shouldn't be allowed to abuse their position, their importance in our economy, and hold the rest of us hostage. The reward for undermining our country's financial well-being shouldn't be generous bail outs and deregulation, it should be increased oversight and more regulation. It is obvious that allowing mortgage lenders and financial institutions free reign is folly. They've proven themselves to be greedy and reckless institutions who cannot be trusted as good stewards of our economy. As such, we must diminish their role, reduce the negative impact their failing will have on our economy. Reduce the centralization and accumulation of financial might in the hands of a few and once more return transparency, responsibility, and competitiveness to the world of banking and lending.
1: Juristic persons are legal entities in which a group of real persons can collectively act as a single, new person who then receives some of the benefits associated with being a real person. Jurisitic persons include corporations and political parties.
2: The discount rate is the rate charged by the Federal Reserve to banks who take out short-term loans from the government to meet reserve or liquidity requirements. This is different than the more closely watched fed funds rate which is the rate charged between banks for short-term loans.
